Value creation, CEO incentives and remuneration: evidence from integrated reporting adopters

This study is motivated by the growing importance of Integrated Reporting <IR> as an innovative reporting initiative to foster representation of sustainable value creation over time. Focusing on the International Integrated Reporting Council’s (IIRC) framework on Integrated Reporting <IR>, it examines: whether <IR> adoption is associated with Integrated Thinking, conceived as a long-term and broad concept of value creation focused on financial and nonfinancial capitals (e.g. human, natural, social, or intellectual), as well as with Integrated Performance, a balanced view of results based on economic, environmental, social, and governance (ESG) pillars. To capture Integrated Thinking, it looks at nonfinancial and long-term targets in CEO compensation and the presence of ‘integrated’ strategy and management, while it considers the combined economic, environmental, social and governance scores, as proxies of Integrated Performance. Evidence shows that, compared to non-adopters, <IR> adopters (as identified in the IIRC’s website) are more likely to embrace Integrated Thinking by linking CEO compensation to non-financial targets (human, intellectual, social, and natural) and to the ability to create value in the long term. Furthermore, such firms achieve superior Integrated Performance and better ESG results. Finally, they are also transparent about executives’ incentive and remuneration and their link with value creation by mean of the capitals, disclosing such information through the <IR>. Overall, these results shed light on the potential of <IR> to increase Integrated Thinking and performance measured both in financial and non-financial terms and also show that <IR> plays a role in fostering transparency for remuneration, and more generally for incentives policies.